It is hard to talk about the beneficiaries of a continuing global health crisis, but it may just be that, out of the gloom and doom of covid-19, a larger capital base for private debt emerges and a stronger foundation for the growth of the asset class in Asia-Pacific.
In the cover story for the March issue of Private Debt Investor, to be published soon, we spoke to a wide range of limited partners across Asia-Pacific to find out their thoughts on private debt. The first thing we discovered was that the region’s investors are mostly impressed by how managers in the asset class have dealt with the crisis so far.
“We did not expect a black swan event like covid, however our private debt portfolio was resilient,” says Dong Hun Jang, chief investment officer of Korean public pension fund Public Officials Benefits Association. He was far from the only LP we contacted to use that word “resilient”, which is significant since many investors have been hesitant to commit to private debt until it was seen to prove itself through challenging times.
Ryan Chung, head of Chinese investment bank Huatai International’s structured finance and principal investment team, is also bullish on LPs’ likely attitude to future commitments: “In the near future there will be a wave of LPs in China looking at alternative investment and, with the volatility in private equity exits, we expect and hope more will allocate to private credit.”
Moreover, it is not just the private debt asset class as a whole that is gaining favour, but specifically the Asia-Pacific region. For one thing, many Asian countries have won plaudits for apparently dealing with the virus better than elsewhere in the world and navigating a quicker route back to normality. This has had a positive knock-on effect on economies with China, for example, showing GDP growth of 2.3 percent in 2020 compared with estimated contractions of 3.6 percent in the US and 7.8 percent in the EU. This has meant Asian businesses emerging in better shape on average, especially given that they typically boast lower leverage levels than their counterparts in the US and Europe.
Given the favourable circumstances, we might expect more Asia-Pacific-sourced capital to find its way into the coffers of local managers. Such a move would no doubt be welcome. According to the Asia Credit Council, only 23 percent of capital in Asia-Pacific debt funds currently comes from Asia-Pacific LPs. Having focused their efforts primarily on North American and European GPs, many investors in the region are, perhaps counterintuitively, not currently set up to resource the opportunity on their own doorstep.
There is little doubt, however, that many LPs would like to shop more locally if they can. “Chinese LPs will always have a certain base level comfort with indigenous GPs,” says Chung. “The same applies with Japanese and Korean investors. They like GPs who understand their language and culture.”
Of the $148.7 billion raised globally by private debt funds last year, only $5.4 billion was accounted for by Asia-Pacific-focused managers. But 2021 may prove to be the year they start to move from the margins to the mainstream.
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